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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2004

 

 

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                   to                  

 

Commission File Number 0-4281

 

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA

 

88-0104066

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

6601 S. Bermuda Rd.
Las Vegas, Nevada
    89119

(Address of principal executive offices)       (Zip Code)

 

 

 

Registrant’s telephone number: (702) 270-7600

Registrant’s internet:  www.alliancegaming.com

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act).  Yes    ý    Noo  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý   Yes    o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding as of May 3, 2004, according to the records of the registrant’s registrar and transfer agent was 51,422,947.

 

 



 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended March 31, 2004

 

I N D E X

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Financial Statements

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003
and March 31, 2004

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2004

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations
for the nine months ended March 31, 2003 and 2004

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity
for the nine months ended March 31, 2004

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 2003 and 2004

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Disclosure Controls and Procedures

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

SIGNATURES

 

 

2



 

PART 1

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In 000’s, except share data)

 

 

 

June 30,
2003

 

March 31,
2004

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

38,884

 

$

32,506

 

Accounts and notes receivable, net of allowance for doubtful accounts of $6,962 and $8,191

 

98,368

 

114,844

 

Inventories, net of reserves of $6,503 and $5,694

 

32,102

 

53,236

 

Deferred tax assets, net

 

44,821

 

56,331

 

Other current assets

 

8,010

 

12,004

 

Total current assets

 

222,185

 

268,921

 

 

 

 

 

 

 

Long-term investments (restricted)

 

864

 

2,638

 

Long-term receivables, net of allowance for doubtful accounts of $15 and $18

 

14,865

 

12,020

 

Net investment in sales type leases

 

 

8,269

 

Leased gaming equipment, net of accumulated depreciation of $15,703 and $22,324

 

25,792

 

54,983

 

Property, plant and equipment, net of accumulated depreciation and amortization of $20,495 and $25,948

 

56,894

 

65,542

 

Goodwill, net of accumulated amortization of $5,941 and $5,941

 

63,040

 

135,128

 

Intangible assets, net of accumulated amortization of $12,109 and $10,383

 

26,631

 

64,837

 

Assets of discontinued operations held for sale

 

114,314

 

109,340

 

Other assets, net of reserves of $1,788 and $1,788

 

580

 

6,277

 

Total assets

 

$

525,165

 

$

727,955

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

22,726

 

$

38,729

 

Accrued liabilities

 

30,183

 

53,849

 

Jackpot liabilities

 

10,588

 

14,239

 

Current maturities of long-term debt

 

3,537

 

5,446

 

Liabilities of discontinued operations held for sale

 

16,186

 

24,970

 

Total current liabilities

 

83,220

 

137,233

 

 

 

 

 

 

 

Long-term debt, net

 

341,678

 

424,015

 

Deferred tax liabilities

 

3,920

 

6,676

 

Other liabilities

 

3,387

 

5,048

 

Minority interest

 

1,330

 

1,447

 

Total liabilities

 

433,535

 

574,419

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding

 

12

 

12

 

Common Stock, $.10 par value; 100,000,000 shares authorized; 49,933,000 and 51,266,000 shares issued

 

4,996

 

5,129

 

Treasury stock at cost, 513,000 shares

 

(501

)

(501

)

Additional paid-in capital

 

163,267

 

185,638

 

Accumulated other comprehensive income

 

1,287

 

2,084

 

Accumulated deficit

 

(77,431

)

(38,826

)

Total stockholders’ equity

 

91,630

 

153,536

 

Total liabilities and stockholders’ equity

 

$

525,165

 

$

727,955

 

 

See notes to unaudited condensed consolidated financial statements.

 

3



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2003

 

2004

 

Revenues:

 

 

 

 

 

Gaming equipment and systems

 

$

82,341

 

$

101,977

 

Casino operations

 

13,891

 

14,262

 

 

 

96,232

 

116,239

 

Costs and expenses:

 

 

 

 

 

Cost of gaming equipment and systems

 

34,249

 

41,378

 

Cost of casino operations

 

5,531

 

5,324

 

Selling, general and administrative

 

24,930

 

30,198

 

Research and development costs

 

5,592

 

9,059

 

Depreciation and amortization

 

5,527

 

8,128

 

 

 

75,829

 

94,087

 

 

 

 

 

 

 

Operating income

 

20,403

 

22,152

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

54

 

1,817

 

Interest expense

 

(6,269

)

(4,590

)

Minority interest

 

(729

)

(722

)

Other, net

 

121

 

(182

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

13,580

 

18,475

 

Income tax expense

 

4,653

 

6,234

 

Net income from continuing operations

 

8,927

 

12,241

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Income from discontinued operations of wall machines and amusement games business unit, net

 

2,178

 

 

Income (loss) from discontinued operations of Nevada Route, net

 

425

 

(274

)

Income from discontinued operations of Louisiana Route, net

 

381

 

586

 

Income from discontinued operations of Rail City Casino, net

 

869

 

1,281

 

Income from discontinued operations

 

3,853

 

1,593

 

Net income

 

$

12,780

 

$

13,834

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.18

 

$

0.25

 

Discontinued operations

 

0.08

 

0.03

 

 

 

$

0.26

 

$

0.28

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.18

 

$

0.24

 

Discontinued operations

 

0.07

 

0.03

 

 

 

$

0.25

 

$

0.27

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

49,294

 

50,221

 

 

 

 

 

 

 

Weighted average common and common share equivalents outstanding

 

50,162

 

51,449

 

 

See notes to unaudited condensed consolidated financial statements.

 

4



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

 

 

 

Nine Months Ended March 31,

 

 

 

2003

 

2004

 

Revenues:

 

 

 

 

 

Gaming equipment and systems

 

$

232,507

 

$

286,764

 

Casino operations

 

38,158

 

39,329

 

 

 

270,665

 

326,093

 

Costs and expenses:

 

 

 

 

 

Cost of gaming equipment and systems

 

100,170

 

113,395

 

Cost of casino operations

 

16,051

 

15,211

 

Selling, general and administrative

 

67,125

 

80,812

 

Research and development costs

 

14,725

 

24,462

 

Depreciation and amortization

 

14,680

 

20,595

 

 

 

212,751

 

254,475

 

 

 

 

 

 

 

Operating income

 

57,914

 

71,618

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

181

 

1,943

 

Interest expense

 

(19,464

)

(14,188

)

Minority interest

 

(1,483

)

(1,749

)

Refinancing charge

 

 

(12,293

)

Other, net

 

487

 

(1,081

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

37,635

 

44,250

 

Income tax expense

 

14,609

 

15,944

 

Net income from continuing operations

 

23,026

 

28,306

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Income from discontinued operations of wall machines and amusement games business unit, net

 

1,453

 

 

Income from discontinued operations of Nevada Route, net

 

3,115

 

5,936

 

Income from discontinued operations of Louisiana Route, net

 

940

 

1,316

 

Income from discontinued operations of Rail City Casino, net

 

2,357

 

3,047

 

Income from discontinued operations

 

7,865

 

10,299

 

Net income

 

$

30,891

 

$

38,605

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.57

 

Discontinued operations

 

0.17

 

0.21

 

 

 

$

0.64

 

$

0.78

 

Diluted earnings per share:

 

 

 

 

 

Continuing operations

 

$

0.46

 

$

0.56

 

Discontinued operations

 

0.16

 

0.20

 

 

 

$

0.62

 

$

0.76

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

48,567

 

49,334

 

 

 

 

 

 

 

Weighted average common and common share equivalents outstanding

 

49,581

 

50,522

 

 

See notes to unaudited condensed consolidated financial statements.

 

5



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended March 31, 2004

(In 000’s)

 

 

 

Common Stock

 

Series E

 

Treasury

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Accum.

 

Total
Stock-
holders’

 

 

 

Shares

 

Dollars

 

Special Stock

 

Stock

 

Capital

 

Income

 

Deficit

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2003

 

49,933

 

$

4,996

 

$

12

 

$

(501

)

$

163,267

 

$

1,287

 

$

(77,431

)

$

91,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

38,605

 

38,605

 

Foreign currency translation adjustment

 

 

 

 

 

 

797

 

 

797

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,402

 

Common shares issued upon acquisition of SDG

 

662

 

66

 

 

 

11,883

 

 

 

 

 

11,949

 

Additional Paid in Capital upon issuance of warrants (MindPlay)

 

 

 

 

 

886

 

 

 

886

 

Shares issued upon exercise of options

 

671

 

67

 

 

 

6,556

 

 

 

6,623

 

Tax benefit of employee stock option exercises

 

 

 

 

 

3,046

 

 

 

3,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2004

 

51,266

 

$

5,129

 

$

12

 

$

(501

)

$

185,638

 

$

2,084

 

$

(38,826

)

$

153,536

 

 

See notes to unaudited condensed consolidated financial statements.

 

6



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000’s)

 

 

 

Nine Months Ended March 31,

 

 

 

2003

 

2004

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

Net income

 

$

30,891

 

$

38,605

 

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:

 

 

 

 

 

Income from discontinued operations

 

(7,865

)

(10,299

)

Depreciation and amortization

 

14,680

 

20,595

 

Refinancing charge

 

 

12,293

 

Deferred income taxes

 

14,886

 

(6,257

)

Provision for losses on receivables

 

1,224

 

755

 

Other

 

1,565

 

(1,354

)

Change in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(35,712

)

(8,725

)

Inventories

 

(823

)

(3,080

)

Other current assets

 

(2,791

)

(627

)

Accounts payable

 

9,634

 

9,893

 

Accrued liabilities and jackpot liabilities

 

(674

)

16,255

 

Net cash provided by operating activities of continuing operations

 

25,015

 

68,054

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

Additions to property, plant and equipment

 

(7,462

)

(9,556

)

Additions to leased gaming equipment

 

(14,794

)

(26,372

)

Additions to other long-term assets

 

(2,628

)

(12,825

)

Advances of notes receivable due from Sierra Design Group

 

 

(72,820

)

Acquisitions, net of cash acquired

 

(3,038

)

(50,675

)

Proceeds from sale of assets of discontinued operations

 

 

16,500

 

Net cash used in investing activities of continuing operations

 

(27,922

)

(155,748

)

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

Debt issuance costs

 

 

(6,954

)

Premium and consent fees paid on redemption of subordinated notes

 

 

(5,399

)

Proceeds from issuance of long-term debt

 

 

350,000

 

Net change in revolving credit facility

 

 

70,000

 

Payoff of debt from refinancing

 

 

(337,625

)

Reduction of long-term debt

 

(3,364

)

(2,986

)

Proceeds from exercise of stock options

 

1,961

 

6,623

 

Net cash (used in) provided by financing activities of continuing operations

 

(1,403

)

73,659

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

905

 

100

 

 

 

 

 

 

 

Cash and cash equivalents provided by discontinued operations

 

8,740

 

7,557

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Increase (decrease) for the period

 

5,335

 

(6,378

)

Balance, beginning of period

 

31,800

 

38,884

 

Balance, end of period

 

$

37,135

 

$

32,506

 

 

See notes to unaudited condensed consolidated financial statements.

 

7



 

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      BASIS OF PRESENTATION

 

Principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation (“Alliance” or the “Company”) for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s annual report on Form 10-K for the year ended June 30, 2003.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Alliance, and its wholly owned and partially owned, controlled subsidiaries. In the case of Video Services, Inc. (“VSI”), the Company owns 100% of the voting stock. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends are declared.

 

The Company, through a wholly-owned subsidiary, is the general partner of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an independent third party, is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount for the proportional revenues above $35.0 million) each year through December 31, 2010. The Company holds the remaining economic interest in the partnership and consolidates the partnership.

 

The Company records minority interest expense to reflect the portion of earnings of VSI and RCVP attributable to the minority shareholders.

 

During the fiscal year ended June 30, 2003, the Company acquired 100 percent of the stock of three companies: Casino Management Systems Software Company (“CMS”) on November 13, 2002, Micro Clever Consulting Systems Company (“MCC”) on April 9, 2003 and Honeyframe Systems Company (“HSC”) on May 28, 2003.

 

On December 31, 2003, the Company acquired 100% of the assets of U.K. based Crown Gaming from Crown Leisure Limited (“Crown”).   The purchase price in cash was $3.9 million of which approximately $1.0 million was allocated to goodwill.  The acquisition, which includes Crown’s distributorship agreements for a wide variety of automated table games and video bingo machines, strategically builds on the Company’s focus towards future growth projected in England.

 

During the quarter ended March 31, 2004, the Company completed the acquisition of substantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), a leading developer of advanced table game technologies and completed the acquisition of Sierra Design Group (“SDG”), a leading supplier of Class II and Class III gaming devices, systems and technology, details of which are included in Note 9.

 

All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.

 

8



 

Revenue recognition

 

Revenue from sales of gaming machines is generally recognized at the time products are shipped and title has passed to the customer. Games placed with customers on a trial basis are not recognized as revenue until the trial period ends and the customer accepts the games. The Company sells gaming equipment on normal credit terms (generally 2%, net 30) and offers financing to qualified customers for periods generally between 6 and 48 months.

 

Revenue from sales of computerized monitoring systems is recognized in accordance with the AICPA’s Statement of Position 97-2 (“SOP 97-2”) “Software Revenue Recognition.”  In accordance with the provisions of SOP 97-2, the contracts for the sales of computerized monitoring units are considered to have “multiple elements” because they include hardware, software, installation, supervision, training, and post-contract customer support. Accordingly, revenues from the sale of systems are deferred and begin to be recognized at the point when the system is deemed to be functionally operational, and the residual method is used to recognize revenue for the remaining elements as they are delivered, each having vendor-specific objective evidence of relative fair values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).

 

Our Bally Gaming and Systems business unit earns revenues from recurring revenue sources that consist of the operations of the wide-area progressive jackpot systems and revenues from gaming machines placed in a casino on a daily lease or rental basis. Revenue from these sources is recognized based on the contractual terms of the participation or rental agreements and is generally based on a share of money wagered, a share of the net winnings, or on a fixed daily rental rate basis.

 

In accordance with industry practice, the Company recognizes gaming revenues in its route and casino operations as the net win from gaming machine operations, which is the difference between coins and currency deposited into the machines and payments to customers and, for other games, the difference between gaming wins and losses.  The Company recognizes total net win from gaming machines as revenues for route operations, which the Company operates pursuant to revenue-sharing arrangements and revenue-sharing payments (either fixed or variable) as a cost of route operations.

 

The Company continuously monitors its exposure for credit losses and maintains allowances for anticipated losses.

 

Capitalized Costs

 

During fiscal year 2004, Bally Gaming and Systems has experienced an almost four fold increase in the volume of product submissions to the various domestic regulatory bodies, each of which charges fees for the testing and approval of each product. Product testing costs are capitalized once technological feasibility has been established and are amortized, generally over a three year period once the product is placed in service. Product testing costs related to projects that are discontinued are expensed when such determination is made. The year to date fees incurred for such regulatory approvals totaled approximately $4.0 million. Of these amounts incurred, for the quarter ended March 31, 2004, the Company capitalized a total of $1.6 million that was directly attributable to products that have been approved and amortization expenses totaled $0.3 million.

 

Recently Issued Accounting Pronouncements

 

In December 2003, the Financial Accounting Standards Board published FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) (“FIN46-R”), clarifying FIN 46 and exempting certain entities from the provisions of FIN 46. Generally, application of FIN 46-R is required in financial statements of public entities that have interests in structures commonly referred to as special-purpose entities for periods ending after December 15, 2003, and, for other types of VIEs, for periods ending after December 15, 2004.  The Company has reviewed this pronouncement and determined it is not applicable.

 

9



 

In December 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 132-R “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106.”  This statement revises employers’ disclosures about pension plans and other postretirement benefit plans.  The Company has reviewed this pronouncement and determined it is not applicable.

 

2.                                      EARNINGS PER SHARE

 

The following computation of basic and diluted earnings per share and weighted average common and common share equivalents outstanding is as follows (in 000’s except per share amounts):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

8,927

 

$

12,241

 

$

23,026

 

$

28,306

 

Net income from discontinued operations

 

3,853

 

1,593

 

7,865

 

10,299

 

Net income

 

$

12,780

 

$

13,834

 

$

30,891

 

$

38,605

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

49,294

 

50,221

 

48,567

 

49,334

 

Effect of dilutive securities

 

868

 

1,228

 

1,014

 

1,188

 

Weighted average common and common share equivalents outstanding

 

50,162

 

51,449

 

49,581

 

50,522

 

 

 

 

 

 

 

 

 

 

 

Earnings per basic share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.25

 

$

0.47

 

$

0.57

 

Income from discontinued operations

 

0.08

 

0.03

 

0.17

 

0.21

 

 

 

$

0.26

 

$

0.28

 

$

0.64

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

Earnings per diluted share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.24

 

$

0.46

 

$

0.56

 

Income from discontinued operations

 

0.07

 

0.03

 

0.16

 

0.20

 

 

 

$

0.25

 

$

0.27

 

$

0.62

 

$

0.76

 

 

Diluted earnings per share represent the potential dilution that could occur if all dilutive securities outstanding were exercised. Certain securities do not have a dilutive effect because their exercise price exceeds the average fair market value of the underlying stock during the respective period. Such securities are excluded from the diluted earnings per share calculation and consist of the following (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Stock options

 

716

 

2

 

716

 

1,435

 

 

The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, because the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

 

In 1998, the Company adopted SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under SFAS No. 123 companies may continue to account for employee stock-based compensation under APB 25, but are required to disclose historical pro-forma net income and earnings per share that would have resulted from the use of the fair value method described in SFAS No. 123.

 

10



 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Under the fair value method, compensation costs are measured using an options pricing model and amortized over the estimated life of the option, which is generally three to ten years, with option forfeitures accounted for at the time of the forfeiture, and all amounts are reflected net of tax.  The historical and pro forma net income (assuming an after-tax charge for stock-based compensation) and related per share data are as follows (in 000’s, except per share data):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Net income

 

 

 

 

 

 

 

 

 

As reported

 

$

12,780

 

$

13,834

 

$

30,891

 

$

38,605

 

Stock-based compensation under FASB No. 123

 

(617

)

(1,483

)

(2,266

)

(3,377

)

Pro forma net income

 

$

12,163

 

$

12,351

 

$

28,625

 

$

35,228

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic – As reported

 

$

0.26

 

$

0.28

 

$

0.64

 

$

0.78

 

Basic - Pro forma

 

$

0.25

 

$

0.25

 

$

0.59

 

$

0.71

 

Diluted – As reported

 

$

0.25

 

$

0.27

 

$

0.62

 

$

0.76

 

Diluted – Pro forma

 

$

0.24

 

$

0.24

 

$

0.58

 

$

0.70

 

 

On the date of grant using the Black-Scholes option-pricing model, the following assumptions were used to value the options in the periods indicated:

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Risk-fee interest rate

 

3.5

%

3.5

%

3.5

%

3.5

%

Expected volatility

 

0.28

 

0.26

 

0.28

 

0.26

 

Expected dividend yield

 

0

 

0

 

0

 

0

 

Expected life

 

3-10 years

 

3-10 years

 

3-10 years

 

3-10 years

 

 

The resulting fair values applied to the options granted were $5.51 and $9.18 per share for the quarter ended March 31, 2003 and 2004 and were $6.21 and $9.24 per share for the nine month periods ended March 31, 2003 and 2004, respectively.

 

3.                                      DISCONTINUED OPERATIONS

 

In July 2003 the Company announced it had entered into definitive sale agreements for each component of its route operations segment consisting of United Coin Machine Co. (“UCMC”) and Video Services, Inc. (“VSI”) and its German wall machine and amusement games segment (Alliance Automaten GmbH & Co. KG dba Bally Wulff).

 

The sale of Bally Wulff was consummated on July 18, 2003, at which time the Company received $16.5 million in cash consideration.  Pursuant to the sale agreement, the Company used $5.6 million of the sale proceeds to purchase a 5 million Euro certificate of deposit as collateral for a tax claim currently being negotiated with the German tax authorities, for which the Company has indemnified the buyer.  The certificate of deposit is included in Other Assets in the accompanying unaudited financial statements.

 

The Company has entered into a definitive agreement for the sale of UCMC to the privately held Century Gaming, Inc. based in Montana.  The sales price is based on a multiple of EBITDA (as defined in the sale agreement).  The

 

11



 

closing of this transaction is subject to customary closing conditions, including that the buyer obtain the necessary gaming licenses. This transaction is expected to close in June 2004.

 

Through a wholly owned subsidiary, Alliance owns 100 percent of the class B voting shares of VSI.  Alliance and the owners of the class A shares have entered into a definitive agreement to sell 100 percent of VSI’s stock to Gentilly Gaming, LLC. The all-cash transaction is subject to customary closing conditions and is expected to close on June 30, 2004.  Concurrent with the sale agreement, VSI has entered into a 12-month operating agreement extension under terms and conditions that are the same as the existing agreement with the Fair Grounds Corporation.

 

On December 8, 2003 the Company announced that it had entered into an agreement for the sale of its Rail City Casino.  The sale was completed on May 3, 2004 and Alliance received cash of $37.9 million.

 

As a result of the transactions described above, each of the four businesses is treated as discontinued operations, and their results are presented net of applicable income taxes below income from continuing operations in the accompanying unaudited condensed consolidated statements of operations. In accordance with accounting principles generally accepted in the United States of America, depreciation and amortization for these discontinued operations ceased as of July 1, 2003 for UCMC and VSI and as of December 8, 2003 for Rail City Casino as a result of their designation as assets held for sale. The assets and liabilities of the businesses are now classified as held for sale in the accompanying unaudited condensed consolidated balance sheets. The prior year results have been reclassified to conform to the current year presentation.

 

Summary operating results for the discontinued operations for UCMC, VSI, Bally Wulff and Rail City Casino are as follows (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

79,223

 

$

68,797

 

$

225,148

 

$

192,330

 

Operating income

 

4,875

 

8,716

 

11,038

 

23,462

 

Income tax expense

 

920

 

7,023

 

3,501

 

11,747

 

Income from discontinued operations

 

$

3,853

 

$

1,593

 

$

7,865

 

$

10,299

 

 

The following net assets held for sale are included in the accompanying unaudited condensed consolidated balance sheets (in 000’s):

 

 

 

June 30,
2003

 

March 31,
2004

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,918

 

$

31,054

 

Accounts and contracts receivable

 

21,627

 

6,203

 

Other current assets

 

5,200

 

3,756

 

Property, plant and equipment

 

33,316

 

44,485

 

Intangible assets

 

21,695

 

20,180

 

Other

 

3,558

 

3,662

 

Total assets

 

114,314

 

109,340

 

 

 

 

 

 

 

Current liabilities

 

11,913

 

20,639

 

Long-term liabilities

 

4,273

 

4,331

 

Total liabilities

 

16,186

 

24,970

 

Net assets of discontinued operations

 

$

98,128

 

$

84,370

 

 

12



 

4.                                      INVENTORIES

 

Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead.

 

Inventories, net of reserves, consisted of the following (in 000’s):

 

 

 

June 30,
2003

 

March 31,
2004

 

 

 

 

 

 

 

Raw materials

 

$

13,720

 

$

19,479

 

Work-in-process

 

789

 

2,871

 

Finished goods

 

17,593

 

30,886

 

Total

 

$

32,102

 

$

53,236

 

 

5.                                      DEBT

 

Long-term debt and lines of credit consisted of the following (in 000’s):

 

 

 

June 30,
2003

 

March 31,
2004

 

 

 

 

 

 

 

Term loan facility

 

$

187,625

 

$

350,000

 

Revolving credit facility

 

 

70,000

 

10% Sr. Subordinated Notes, net of unamortized discount

 

149,663

 

 

Other subordinated debt

 

495

 

 

Other, generally secured by related equipment

 

7,432

 

9,461

 

 

 

345,215

 

429,461

 

Less current maturities

 

3,537

 

5,446

 

Long-term debt, net of current maturities

 

$

341,678

 

$

424,015

 

 

The Company’s debt structure at June 30, 2003 consisted primarily of a $190 million term loan facility and a $23.7 million undrawn revolving credit facility and $150 million 10% Senior Subordinated Notes (“Subordinated Notes”). The term loan had an interest rate of LIBOR plus 3.25% (or 4.45% as of June 30, 2003).

 

On September 5, 2003, the Company completed a senior bank debt refinancing transaction (the “Refinancing”) whereby the Company entered into a new $275 million term loan facility and a $125 million revolving credit facility. Proceeds from the new loans were used to repay the existing bank term loans totaling approximately $188 million, repay the Subordinated Notes, and to pay transaction fees and expenses.  The new term loan had an interest rate of LIBOR plus 2.75%, which was later reduced to LIBOR + 2.50% (or 3.79% as of March 31, 2004), has a 1% per year mandatory principal amortization after the first year, and a 6-year maturity.  The revolving credit facility has an interest rate of LIBOR plus 2.50% (or 3.79% as March 31, 2004), and the commitment decreases ratably over its 5-year term to a 60% balloon.  During the December 2003 quarter the Company increased the term loan by $75 million, to a total of $350 million outstanding.  The proceeds were used primarily to fund the acquisition SDG.  As a result the Company incurred an additional $1.3 million in debt issuance costs, which have been capitalized and will be amortized over the remaining term of the loan.

 

On August 13, 2003, the Company initiated a tender offer and consent solicitation for all of the outstanding Subordinated Notes at a price of 103.33% plus a .25% tender premium which was contingent on the closing of the new bank facility.  On September 10, 2003, the tender offer period expired, with $78.6 million of the Subordinated Notes having been tendered.  On September 11, 2003, the Company initiated redemption of the remaining Subordinated Notes at a price of 103.33%, which was completed on September 16, 2003, at which time the Subordinated Notes were fully redeemed.

 

13



 

As a result of the Refinancing described above, the Company recorded a pre-tax charge in the quarter ended September 30, 2003 of $12.3 million, which includes a $5.0 million charge for the early extinguishment of the Subordinated Notes, $7.0 million for the non-cash write off of deferred financing costs, and $0.3 million in fees and expenses.

 

The new bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the Company, other than the entity that holds the Company’s interest in its Louisiana and Mississippi operations, and is secured by a Pledge Agreement. The bank facility contains a number of maintenance covenants and other significant covenants that, among other things, restrict the ability of the Company and the ability of certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company’s subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities.  As of March 31, 2004, the Company is in compliance with these covenants.

 

6.                                      SEGMENTS AND GEOGRAPHICAL INFORMATION

 

The Company currently operates in two business segments (exclusive of the two business segments included in discontinued operations): (i) Gaming Equipment and Systems which designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, and (ii) Casino Operations which owns and operates one regional casino. The accounting policies of these segments are consistent with the Company’s policies for the unaudited condensed consolidated financial statements.

 

The table below presents information as to the Company’s revenues, intersegment revenues and operating income (loss) by segment (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Revenues:

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

82,341

 

$

101,977

 

$

232,507

 

$

286,764

 

Casino Operations

 

13,891

 

14,262

 

38,158

 

39,329

 

Total revenues

 

$

96,232

 

$

116,239

 

$

270,665

 

$

326,093

 

 

 

 

 

 

 

 

 

 

 

Intersegment revenues:

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

60

 

$

106

 

$

1,378

 

$

447

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Gaming Equipment and Systems

 

$

19,056

 

$

20,096

 

$

55,966

 

$

68,670

 

Casino Operations

 

4,843

 

5,157

 

11,388

 

12,985

 

Corporate/other

 

(3,496

)

(3,101

)

(9,440

)

(10,037

)

Total operating income

 

$

20,403

 

$

22,152

 

$

57,914

 

$

71,618

 

 

The Company has operations based primarily in the United States with a significant sales and distribution office based in Germany.

 

14



 

The table below presents information as to the Company’s revenues and operating income (loss) by geographic region (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Revenues:

 

 

 

 

 

 

 

 

 

United States

 

$

85,206

 

$

109,809

 

$

241,673

 

$

300,149

 

Germany

 

7,309

 

2,901

 

21,726

 

14,695

 

Other foreign

 

3,717

 

3,529

 

7,266

 

11,249

 

Total revenues

 

$

96,232

 

$

116,239

 

$

270,665

 

$

326,093

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

United States

 

$

19,589

 

$

22,516

 

$

55,515

 

$

69,488

 

Germany

 

535

 

695

 

2,102

 

2,645

 

Other foreign

 

279

 

(1,059

)

297

 

(515

)

Total operating income

 

$

20,403

 

$

22,152

 

$

57,914

 

$

71,618

 

 

7.                                      SUPPLEMENTAL CASH FLOW INFORMATION

 

The following supplemental information is related to the unaudited condensed consolidated statements of cash flows (in 000’s).

 

 

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

 

 

 

 

 

 

Cash paid for interest

 

$

23,126

 

$

19,779

 

Cash paid for income taxes

 

1,609

 

3,425

 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

Reclassify property, plant and equipment to inventory

 

$

2,777

 

$

3,793

 

Favorable translation rate adjustment

 

3,873

 

697

 

Notes payable issued in acquisition

 

3,000

 

4,000

 

 

See Note 9 for assets and liabilities assumed in acquisitions.

 

8.                                      COMMITMENTS AND CONTINGENCIES

 

The Company is a party to various lawsuits relating to routine matters incidental to its business.  Management does not believe that the outcome of such litigations, in the aggregate, will have a material adverse effect on the Company.

 

On February 19, 2004, the Company completed the acquisition of MindPlay. The Company purchased substantially all of the assets and liabilities of MindPlay for consideration of $11.0 million in cash, a promissory note in the amount of $4.0 million and a warrant to purchase 100,000 shares of Alliance Common Stock, plus transaction fees and expense resulting in total consideration of $15.9 million.  Additional consideration may become payable in cash over the next 13 years upon the MindPlay business unit achieving certain significant revenue and gross margin targets.

 

Additionally, on March 2, 2004, the Company completed the acquisition of SDG. The Company purchased 100 percent of the outstanding shares of SDG for consideration of approximately $29.8 million in cash and 662,000 shares of Alliance Common Stock. In addition, the Company assumed approximately $80 million of debt (including approximately $72 million of loans payable to Alliance which now has been forgiven), plus transaction fees and expenses, resulting in total initial consideration of $126.4 million. Additional contingent consideration of up to $95.6 million may become payable, in equal portions of cash and stock, over the next three fiscal years upon the SDG business unit achieving certain significant revenue and EBITDA targets.

 

15



 

9.                                      ACQUISITIONS

 

Under the purchase method of accounting, the total purchase price is allocated to the net tangible and intangible assets based upon their estimated fair market values as of the date of the acquisitions. The allocation of the purchase price to goodwill and intangibles is subject to change based on final valuation of net assets (including inventory and property, plant and equipment) and is based upon independent third-party valuations and management’s estimates.

 

SIERRA DESIGN GROUP

 

On March 2, 2004, Alliance completed the acquisition of 100% of the shares of privately held SDG.  Consideration totaled $126.4 million, and additional contingent consideration of up to $95.6 million may become payable over the next three years upon the SDG business unit achieving certain revenues and EBITDA targets.

 

 

The fair values preliminarily assigned to the SDG assets and liabilities were as follows (in 000’s):

 

Tangible Assets:

 

 

 

Cash

 

$

1,189

 

Accounts receivable

 

6,949

 

Inventories

 

12,088

 

Deposits

 

1,576

 

Other current assets

 

2,233

 

Investment in Sales-type leases

 

8,241

 

Property, Plant and Equipment

 

22,205

 

Other Assets

 

103

 

Deferred Tax Assets

 

9,921

 

Notes Receivable

 

678

 

 

 

65,183

 

Liabilities:

 

 

 

Customer deposits

 

4,973

 

Accounts payable

 

6,110

 

Accrued liabilities

 

10,687

 

Notes Payable

 

3,704

 

 

 

25,474

 

Net tangible assets acquired

 

39,709

 

Intangible assets acquired:

 

 

 

Contracts

 

12,320

 

Patents/core technology

 

5,445

 

Trade name/ Trademark

 

5,708

 

 

 

23,473

 

Goodwill

 

63,211

 

Total Purchase Price

 

$

126,393

 

 

The purchase price paid for SDG consists of the following (in thousands):

 

Cash paid to SDG stockholders

 

$

29,846

 

Fair value of restricted Alliance Gaming common stock issued

 

11,950

 

Deferred consideration

 

1,350

 

Transaction fees and expenses

 

4,739

 

Subtotal

 

$

47,885

 

SDG loans to third parties

 

5,688

 

Pre-acquisition loans from Alliance to SDG forgiven

 

72,820

 

Acquisition cost

 

$

126,393

 

 

16



 

The following intangible assets of SDG are being amortized with the following lives:

 

 

 

Lives

 

Contracts

 

10

 

Patents/core technology

 

8

 

Trade name/trademark

 

5

 

 

The value assigned to the restricted stock totaled $11.9 million, and was determined by an independent third-party, and resulted in a 30% discount to the stock price two days before and after the announcement of the acquisition.  Pursuant to a loan agreement between Alliance and SDG, Alliance committed to loan SDG up to $74 million during the pre-acquisition period.  As of December 31, 2003, Alliance had advanced $61.0 million, and as of the acquisition date the loan balance totaled $72.8 million, which was forgiven as of the acquisition date.  Including the loan advances of $72.8 million, the cash paid for SDG totaled $108.6 million.

 

The following unaudited proforma financial information is presented as if the SDG acquisition had been completed at the beginning of the relative period (in 000’s, except per share information).

 

 

 

Nine months ended

 

 

 

March 31,
2003

 

March 31,
2004

 

 

 

 

 

 

 

Total revenue

 

$

346,560

 

$

392,811

 

Income from continuing operations before taxes

 

40,523

 

28,177

 

Income from continuing operations

 

24,817

 

18,341

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

Basic

 

$

0.50

 

$

0.37

 

Diluted

 

$

0.49

 

$

0.36

 

 

MINDPLAY

 

On February 19, 2004, Alliance completed the acquisition of substantially all of the assets and liabilities of MindPlay LLC.  The consideration consisted of $9 million in cash, a note payable totaling $4.0 million, assumption of $2.0 million of long-term debt, and warrants to purchase 100,000 Alliance common stock valued at $1.0 million. Additional contingent consideration is payable over the next 13 years based on certain MindPlay product revenues and gross margin targets.

 

The fair values preliminarily assigned to the MindPlay assets and liabilities are as follows (in 000’s):

 

Tangible Assets:

 

 

 

Cash

 

$

22

 

Accounts receivable

 

41

 

Inventories

 

110

 

Property, plant and equipment

 

143

 

Other Assets

 

43

 

 

 

359

 

Liabilities:

 

 

 

Customer deposits

 

467

 

Net tangible assets acquired

 

(108

)

 

 

 

 

Intangible assets acquired:

 

 

 

Patents

 

11,255

 

 

 

 

 

Goodwill

 

5,644

 

Total Purchase Price

 

$

16,791

 

 

The acquired patents, which are classified as intangible assets, are being amortized over the remaining life of the patents, which is approximately 15 years.

 

17



 

10.                               UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

 

The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company’s new bank credit agreement. The financial information presented includes Alliance (the “Parent”), its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries Video Services, Inc., the Rainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and the Parent’s non-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to the unaudited condensed consolidating financial statements should be read in conjunction with these unaudited condensed consolidating financial statements.

 

18



 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

June 30, 2003

(In 000’s)

 

ASSETS

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,730

 

$

18,036

 

$

8,118

 

$

 

$

38,884

 

Accounts and notes receivable, net

 

738

 

70,880

 

27,496

 

(746

)

98,368

 

Inventories, net

 

 

29,801

 

2,518

 

(217

)

32,102

 

Deferred tax assets, net

 

33,182

 

11,639

 

 

 

44,821

 

Other current assets

 

404

 

7,110

 

496

 

 

8,010

 

Total current assets

 

47,054

 

137,466

 

38,628

 

(963

)

222,185

 

Long-term investments (restricted)

 

 

864

 

 

 

864

 

Long-term receivables, net

 

159,723

 

15,113

 

12

 

(159,983

)

14,865

 

Leased gaming equipment, net

 

 

25,792

 

 

 

25,792

 

Property, plant and equipment, net

 

74

 

20,394

 

36,426

 

 

56,894

 

Goodwill, net

 

(900

)

48,293

 

15,647

 

 

63,040

 

Intangible assets, net

 

7,049

 

14,550

 

5,032

 

 

26,631

 

Investments in subsidiaries

 

294,513

 

74,990

 

 

(369,503

)

 

Deferred tax assets, net

 

3,394

 

 

 

(3,394

)

 

Assets of discontinued operations held for sale

 

16,539

 

93,672

 

4,103

 

 

114,314

 

Other assets, net

 

(84,406

)

99,918

 

(14,933

)

1

 

580

 

 

 

$

443,040

 

$

531,052

 

$

84,915

 

$

(533,842

)

$

525,165

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,295

 

$

19,507

 

$

1,924

 

$

 

$

22,726

 

Accrued liabilities

 

7,378

 

18,188

 

5,368

 

(751

)

30,183

 

Jackpot liabilities

 

 

10,446

 

142

 

 

10,588

 

Current maturities of long-term debt

 

2,395

 

1,124

 

18

 

 

3,537

 

Liabilities of disc. operations held for sale

 

1,000

 

14,358

 

828

 

 

16,186

 

Total current liabilities

 

12,068

 

63,623

 

8,280

 

(751

)

83,220

 

 

 

 

 

 

 

 

 

 

 

 

 

Long term debt, net

 

335,388

 

166,013

 

 

(159,723

)

341,678

 

Deferred tax liabilites

 

 

5,679

 

1,635

 

(3,394

)

3,920

 

Other liabilities

 

2,624

 

753

 

10

 

 

3,387

 

Minority interest

 

1,330

 

 

 

 

1,330

 

Total liabilities

 

351,410

 

236,068

 

9,925

 

(163,868

)

433,535

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Special Stock Series E

 

12

 

 

 

 

12

 

Common Stock

 

4,996

 

478

 

1,027

 

(1,505

)

4,996

 

Treasury stock

 

(501

)

 

 

 

(501

)

Additional paid-in capital

 

163,267

 

190,449

 

33,415

 

(223,864

)

163,267

 

Accumulated other comprehensive income (loss)

 

1,287

 

1,290

 

1,267

 

(2,557

)

1,287

 

Retained earnings (accumulated deficit)

 

(77,431

)

102,767

 

39,281

 

(142,048

)

(77,431

)

Total stockholders’ equity

 

91,630

 

294,984

 

74,990

 

(369,974

)

91,630

 

 

 

$

443,040

 

$

531,052

 

$

84,915

 

$

(533,842

)

$

525,165

 

 

See accompanying unaudited notes.

 

19



 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

March 31, 2004

(In 000’s)

 

ASSETS

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,511

 

$

13,124

 

$

7,871

 

$

 

$

32,506

 

Accounts and notes receivable, net

 

1,257

 

95,229

 

19,284

 

(926

)

114,844

 

Inventories, net

 

 

49,424

 

4,017

 

(205

)

53,236

 

Deferred tax assets, net

 

31,465

 

24,866

 

 

 

56,331

 

Other current assets

 

1,050

 

10,844

 

110

 

 

12,004

 

Total current assets

 

45,283

 

193,487

 

31,282

 

(1,131

)

268,921

 

Long-term investments (restricted)

 

 

2,638

 

 

 

2,638

 

Long-term receivables, net

 

245,400

 

10,665

 

22

 

(244,067

)

12,020

 

Lease Receivable

 

 

8,269

 

 

 

8,269

 

Leased gaming equipment, net

 

 

54,983

 

 

 

54,983

 

Property, plant and equipment, net

 

74

 

28,858

 

36,610

 

 

65,542

 

Goodwill, net

 

(900

)

117,167

 

18,861

 

 

135,128

 

Intangible assets, net

 

6,215

 

54,465

 

4,157

 

 

64,837

 

Investments in subsidiaries

 

427,895

 

74,900

 

 

(502,795

)

 

Deferred tax assets, net

 

1,999

 

 

 

(1,999

)

 

Assets of discontinued operations held for sale

 

39

 

104,794

 

4,507

 

 

109,340

 

Other assets, net

 

(132,181

)

150,082

 

(11,627

)

3

 

6,277

 

 

 

$

593,824

 

$

800,308

 

$

83,812

 

$

(749,989

)

$

727,955

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,052

 

$

35,532

 

$

1,145

 

$

 

$

38,729

 

Accrued liabilities

 

8,436

 

41,671

 

4,677

 

(935

)

53,849

 

Jackpot liabilities

 

 

14,050

 

189

 

 

14,239

 

Current maturities of long-term debt

 

2,438

 

3,005

 

3

 

 

5,446

 

Liabilities of disc. operations held for sale

 

1,729

 

21,973

 

1,268

 

 

24,970

 

Total current liabilities

 

14,655

 

116,231

 

7,282

 

(935

)

137,233

 

 

 

 

 

 

 

 

 

 

 

 

 

Long term debt, net

 

421,562

 

246,353

 

 

(243,900

)

424,015

 

Deferred tax liabilites

 

 

7,040

 

1,635

 

(1,999

)

6,676

 

Other liabilities

 

2,624

 

2,424

 

 

 

5,048

 

Minority interest

 

1,447

 

 

 

 

1,447

 

Total liabilities

 

440,288

 

372,048

 

8,917

 

(246,834

)

574,419

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Special Stock Series E

 

12

 

 

 

 

12

 

Common Stock

 

5,129

 

478

 

1,027

 

(1,505

)

5,129

 

Treasury stock

 

(501

)

 

 

 

(501

)

Additional paid-in capital

 

185,638

 

260,813

 

33,415

 

(294,228

)

185,638

 

Accumulated other comprehensive income (loss)

 

2,084

 

2,084

 

3,014

 

(5,098

)

2,084

 

Retained earnings (accumulated deficit)

 

(38,826

)

164,885

 

37,439

 

(202,324

)

(38,826

)

Total stockholders’ equity

 

153,536

 

428,260

 

74,895

 

(503,155

)

153,536

 

 

 

$

593,824

 

$

800,308

 

$

83,812

 

$

(749,989

)

$

727,955

 

 

See accompanying unaudited notes.

 

20



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended March 31, 2003

(In 000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

80,227

 

$

11,044

 

$

(8,930

)

$

82,341

 

Casino operations

 

 

 

15,545

 

(1,654

)

13,891

 

 

 

 

80,227

 

26,589

 

(10,584

)

96,232

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

35,554

 

7,746

 

(9,051

)

34,249

 

Cost of casino operations

 

 

 

5,531

 

 

5,531

 

Selling, general and administrative

 

2,895

 

17,799

 

5,907

 

(1,671

)

24,930

 

Research and development costs

 

 

4,436

 

1,156

 

 

5,592

 

Depreciation and amortization

 

600

 

4,334

 

593

 

 

5,527

 

 

 

3,495

 

62,123

 

20,933

 

(10,722

)

75,829

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(3,495

)

18,104

 

5,656

 

138

 

20,403

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

18,941

 

3,507

 

 

(22,448

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,061

 

 

26

 

(3,033

)

54

 

Interest expense

 

(6,220

)

(3,069

)

(13

)

3,033

 

(6,269

)

Rainbow royalty

 

1,742

 

 

(1,742

)

 

 

Minority interest

 

(729

)

 

 

 

(729

)

Other, net

 

433

 

(83

)

(229

)

 

121

 

Income (loss) from continuing operations before income taxes

 

13,733

 

18,459

 

3,698

 

(22,310

)

13,580

 

Income tax expense (benefit)

 

4,806

 

(343

)

190

 

 

4,653

 

Net income (loss) from continuing operations

 

8,927

 

18,802

 

3,508

 

(22,310

)

8,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations of wall machines and amusement games business unit, net

 

172

 

 

2,006

 

 

2,178

 

Income from disc. ops. of Nevada Route, net

 

 

425

 

 

 

425

 

Income from disc. ops. of Louisiana Route, net

 

 

 

381

 

 

381

 

Income from disc. ops. of Rail City Casino, net

 

 

869

 

 

 

869

 

Earnings from consolidated discontinued operations

 

3,681

 

2,387

 

 

(6,068

)

 

Income (loss) from discontinued operations

 

3,853

 

3,681

 

2,387

 

(6,068

)

3,853

 

Net income (loss)

 

$

12,780

 

$

22,483

 

$

5,895

 

$

(28,378

)

$

12,780

 

 

See accompanying unaudited notes.

 

21



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three months ended March 31, 2004

(In 000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

97,822

 

$

6,430

 

$

(2,275

)

$

101,977

 

Casino operations

 

 

 

15,876

 

(1,614

)

14,262

 

 

 

 

97,822

 

22,306

 

(3,889

)

116,239

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

40,394

 

3,447

 

(2,463

)

41,378

 

Cost of casino operations

 

 

 

5,324

 

 

5,324

 

Selling, general and administrative

 

2,778

 

21,739

 

7,294

 

(1,613

)

30,198

 

Research and development costs

 

 

8,865

 

194

 

 

9,059

 

Depreciation and amortization

 

323

 

7,038

 

767

 

 

8,128

 

 

 

3,101

 

78,036

 

17,026

 

(4,076

)

94,087

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(3,101

)

19,786

 

5,280

 

187

 

22,152

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

17,002

 

2,712

 

 

(19,714

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

5,203

 

98

 

4

 

(3,488

)

1,817

 

Interest expense

 

(4,471

)

(3,600

)

(7

)

3,488

 

(4,590

)

Rainbow royalty

 

1,777

 

 

(1,777

)

 

 

Minority interest

 

(722

)

 

 

 

(722

)

Other, net

 

(422

)

329

 

(183

)

94

 

(182

)

Income (loss) from continuing operations before income taxes

 

15,266

 

19,325

 

3,317

 

(19,433

)

18,475

 

Income tax expense

 

3,025

 

2,605

 

604

 

 

6,234

 

Net income (loss) from continuing operations

 

12,241

 

16,720

 

2,713

 

(19,433

)

12,241

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from disc. ops. of Nevada Route, net

 

 

(274

)

 

 

(274

)

Income from disc. ops. of Louisiana Route, net

 

 

 

586

 

 

586

 

Income from disc. ops. of Rail City Casino, net

 

 

1,281

 

 

 

1,281

 

Earnings from consolidated discontinued operations

 

1,593

 

586

 

 

(2,179

)

 

Income (loss) from discontinued operations

 

1,593

 

1,593

 

586

 

(2,179

)

1,593

 

Net income (loss)

 

$

13,834

 

$

18,313

 

$

3,299

 

$

(21,612

)

$

13,834

 

 

See accompanying unaudited notes.

 

22



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine months ended March 31, 2003

(In 000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

226,753

 

$

29,049

 

$

(23,295

)

$

232,507

 

Casino operations

 

 

 

42,976

 

(4,818

)

38,158

 

 

 

 

226,753

 

72,025

 

(28,113

)

270,665

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

103,192

 

20,333

 

(23,355

)

100,170

 

Cost of casino operations

 

 

 

16,051

 

 

16,051

 

Selling, general and administrative

 

7,753

 

46,976

 

17,270

 

(4,874

)

67,125

 

Research and development costs

 

 

11,778

 

2,947

 

 

14,725

 

Depreciation and amortization

 

1,686

 

11,357

 

1,637

 

 

14,680

 

 

 

9,439

 

173,303

 

58,238

 

(28,229

)

212,751

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(9,439

)

53,450

 

13,787

 

116

 

57,914

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

50,494

 

6,906

 

 

(57,400

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

9,226

 

 

51

 

(9,096

)

181

 

Interest expense

 

(19,339

)

(9,168

)

(53

)

9,096

 

(19,464

)

Rainbow royalty

 

4,786

 

 

(4,786

)

 

 

Minority interest

 

(1,483

)

 

 

 

(1,483

)

Other, net

 

1,199

 

(59

)

(653

)

 

487

 

Income (loss) from continuing operations before income taxes

 

35,444

 

51,129

 

8,346

 

(57,284

)

37,635

 

Income tax expense

 

12,418

 

752

 

1,439

 

 

14,609

 

Net income (loss) from continuing operations

 

23,026

 

50,377

 

6,907

 

(57,284

)

23,026

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from disc. ops. of wall machines and amusement games business unit

 

580

 

(1,210

)

2,083

 

 

1,453

 

Income from disc. ops. of Nevada Route, net

 

 

3,115

 

 

 

3,115

 

Income from disc. ops. of Louisiana Route, net

 

 

 

940

 

 

940

 

Income from disc. ops. of Rail City Casino, net

 

 

2,357

 

 

 

2,357

 

Earnings from consolidated discontinued operations

 

7,285

 

3,023

 

 

(10,308

)

 

Income (loss) from discontinued operations

 

7,865

 

7,285

 

3,023

 

(10,308

)

7,865

 

Net income (loss)

 

$

30,891

 

$

57,662

 

$

9,930

 

$

(67,592

)

$

30,891

 

 

See accompanying unaudited notes.

 

23



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine months ended March 31, 2004

(In 000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gaming equipment and systems

 

$

 

$

275,192

 

$

25,944

 

$

(14,372

)

$

286,764

 

Casino operations

 

 

 

43,873

 

(4,544

)

39,329

 

 

 

 

275,192

 

69,817

 

(18,916

)

326,093

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of gaming equipment and systems

 

 

112,375

 

15,403

 

(14,383

)

113,395

 

Cost of casino operations

 

 

 

15,211

 

 

15,211

 

Selling, general and administrative

 

8,836

 

55,975

 

20,545

 

(4,544

)

80,812

 

Research and development costs

 

 

23,893

 

569

 

 

24,462

 

Depreciation and amortization

 

1,202

 

16,903

 

2,490

 

 

20,595

 

 

 

10,038

 

209,146

 

54,218

 

(18,927

)

254,475

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(10,038

)

66,046

 

15,599

 

11

 

71,618

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings in consolidated subsidiaries

 

61,759

 

8,437

 

 

(70,196

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

11,380

 

103

 

12

 

(9,552

)

1,943

 

Interest expense

 

(13,937

)

(9,765

)

(38

)

9,552

 

(14,188

)

Rainbow royalty

 

4,911

 

 

(4,911

)

 

 

Minority interest

 

(1,749

)

 

 

 

(1,749

)

Refinancing charge

 

(12,293

)

 

 

 

(12,293

)

Other, net

 

(188

)

(58

)

(929

)

94

 

(1,081

)

Income (loss) from continuing operations before income taxes

 

39,845

 

64,763

 

9,733

 

(70,091

)

44,250

 

Income tax expense

 

11,539

 

3,110

 

1,295

 

 

15,944

 

Net income (loss) from continuing operations

 

28,306

 

61,653

 

8,438

 

(70,091

)

28,306

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from disc. ops. of Nevada Route, net

 

 

5,936

 

 

 

5,936

 

Income from disc. ops. of Louisiana Route, net

 

 

 

1,316

 

 

1,316

 

Income from disc. ops of Rail City Casino, net

 

 

3,047

 

 

 

3,047

 

Earnings from consolidated discontinued operations

 

10,299

 

1,316

 

 

(11,615

)

 

Income (loss) from discontinued operations

 

10,299

 

10,299

 

1,316

 

(11,615

)

10,299

 

Net income (loss)

 

$

38,605

 

$

71,952

 

$

9,754

 

$

(81,706

)

$

38,605

 

 

See accompanying unaudited notes.

 

24



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended March 31, 2003

(000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

30,891

 

$

57,662

 

$

9,930

 

$

(67,592

)

$

30,891

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

(7,866

)

(7,285

)

(3,023

)

10,309

 

(7,865

)

Depreciation and amortization

 

1,686

 

11,357

 

1,637

 

 

14,680

 

Deferred income taxes

 

14,903

 

(3

)

(14

)

 

14,886

 

Provision for losses on receivables

 

 

1,203

 

21

 

 

1,224

 

Other

 

811

 

773

 

(19

)

 

1,565

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

(400

)

(29,845

)

(6,026

)

559

 

(35,712

)

Intercompany accounts

 

(27,128

)

(41,527

)

11,227

 

57,428

 

 

Inventories

 

 

339

 

(1,048

)

(114

)

(823

)

Other current assets

 

(246

)

(2,595

)

50

 

 

(2,791

)

Accounts payable

 

2,570

 

7,799

 

(735

)

 

9,634

 

Accrued liabilities and jackpot liabilities

 

(8,328

)

7,915

 

293

 

(554

)

(674

)

Net cash provided by operating activities of continuing operations

 

6,893

 

5,793

 

12,293

 

36

 

25,015

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(2

)

(2,912

)

(4,548

)

 

(7,462

)

Additions to leased gaming equipment

 

 

(14,794

)

 

 

(14,794

)

Additions to other long-term assets

 

(240

)

(2,339

)

(49

)

 

(2,628

)

Acquisitions, net of cash acquired

 

 

(3,038

)

 

 

(3,038

)

Net cash used in investing activities of continuing operations

 

(242

)

(23,083

)

(4,597

)

 

(27,922

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Reduction of long-term debt

 

(2,925

)

(430

)

(9

)

 

(3,364

)

Bally Austria APIC

 

 

 

36

 

(36

)

 

Proceeds from exercise of stock options

 

1,961

 

 

 

 

1,961

 

Dividends received (paid)

 

 

4,665

 

(4,665

)

 

 

Net cash (used in) provided by financing activities of continuing operations

 

(964

)

4,235

 

(4,638

)

(36

)

(1,403

)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 

905

 

 

905

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents provided by (used in) discontinued operations

 

 

10,875

 

(2,135

)

 

8,740

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) for the period

 

5,687

 

(2,180

)

1,828

 

 

5,335

 

Balance, beginning of period

 

8,121

 

17,414

 

6,265

 

 

31,800

 

Balance, end of period

 

$

13,808

 

$

15,234

 

$

8,093

 

$

 

$

37,135

 

 

See accompanying unaudited notes.

 

25



 

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended March 31, 2004

(000’s)

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

38,605

 

$

71,952

 

$

9,754

 

$

(81,706

)

$

38,605

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

(10,299

)

(10,299

)

(1,316

)

11,615

 

(10,299

)

Depreciation and amortization

 

1,202

 

16,903

 

2,490

 

 

20,595

 

Refinancing charge

 

12,293

 

 

 

 

12,293

 

Deferred income taxes

 

4,398

 

(10,655

)

 

 

(6,257

)

Provision for losses on receivables

 

 

721

 

34

 

 

755

 

Other

 

131

 

(1,475

)

(10

)

 

(1,354

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

(187

)

(15,497

)

6,872

 

87

 

(8,725

)

Intercompany accounts

 

(12,546

)

(54,018

)

(3,636

)

70,200

 

 

Inventories

 

 

(3,632

)

564

 

(12

)

(3,080

)

Other current assets

 

(645

)

(1,029

)

1,047

 

 

(627

)

Accounts payable

 

757

 

9,915

 

(779

)

 

9,893

 

Accrued liabilities and jackpot liabilities

 

(2,355

)

19,999

 

(1,205

)

(184

)

16,255

 

Net cash provided by operating activities of continuing operations

 

31,354

 

22,885

 

13,815

 

 

68,054

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(28

)

(6,999

)

(2,529

)

 

(9,556

)

Additions to leased gaming equipment

 

 

(24,496

)

(1,876

)

 

(26,372

)

Additions to other long-term assets

 

(5,580

)

(7,746

)

501

 

 

(12,825

)

Advances of notes receivable due from SDG

 

(72,820

)

 

 

 

(72,820

)

Acquisitions, net of cash acquired

 

(46,796

)

(3,879

)

 

 

(50,675

)

Proceeds from sale of assets of discontinued operations

 

16,500

 

 

 

 

16,500

 

Net cash used in investing activities of continuing operations

 

(108,724

)

(43,120

)

(3,904

)

 

(155,748

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Debt issuance costs

 

(6,954

)

 

 

 

(6,954

)

Premium and consents fees paid on redemption of subordinated notes

 

(5,399

)

 

 

 

(5,399

)

Proceeds from issuance of long-term debt

 

350,000

 

 

 

 

350,000

 

Payoff of debt from refinancing

 

(337,625

)

 

 

 

(337,625

)

Reduction of long-term debt

 

(495

)

(2,476

)

(15

)

 

(2,986

)

Net change in revolving credit facility

 

70,000

 

 

 

 

70,000

 

Proceeds from exercise of stock options

 

6,624

 

(1

)

 

 

6,623

 

Dividends received (paid)

 

 

11,595

 

(11,595

)

 

 

Net cash provided by (used in) financing activities of continuing operations

 

76,151

 

9,118

 

(11,610

)

 

73,659

 

Effect of exchange rate changes on cash

 

 

 

100

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents provided by (used in) discontinued operations

 

 

6,205

 

1,352

 

 

7,557

 

Decrease for the period

 

(1,219

)

(4,912

)

(247

)

 

(6,378

)

Balance, beginning of period

 

12,730

 

18,036

 

8,118

 

 

38,884

 

Balance, end of period

 

$

11,511

 

$

13,124

 

$

7,871

 

$

 

$

32,506

 

 

See accompanying unaudited notes.

 

26



 

Debt and Revolving Credit Facility

 

Long-term debt and lines of credit at June 30, 2003 consisted of the following (in 000’s):

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

10% Senior Subordinated Notes, net of unamortized discount

 

$

149,663

 

$

 

$

 

$

 

$

149,663

 

Term loan facility

 

187,625

 

 

 

 

187,625

 

Other subordinated debt

 

495

 

 

 

 

495

 

Intercompany notes payable

 

 

159,723

 

 

(159,723

)

 

Other

 

 

7,414

 

18

 

 

7,432

 

 

 

337,783

 

167,137

 

18

 

(159,723

)

345,215

 

Less current maturities

 

2,395

 

1,124

 

18

 

 

3,537

 

Long-term debt, net of current maturities

 

$

335,388

 

$

166,013

 

$

 

$

(159,723

)

$

341,678

 

 

Long-term debt and lines of credit at March 31, 2004, consisted of the following (in 000’s):

 

 

 

Parent

 

Guaranteeing
Subsidiaries

 

Non-
Guaranteeing
Subsidiaries

 

Reclas-
sifications
and
Elimina-
tions

 

Alliance
Gaming
Corporation
and
Subsidiaries

 

Term loan facility

 

$

350,000

 

$

 

$

 

$

 

$

350,000

 

Revolving credit facility

 

70,000

 

 

 

 

70,000

 

Intercompany notes payable

 

 

243,900

 

 

(243,900

)

 

Other

 

4,000

 

5,458

 

3

 

 

9,461

 

 

 

424,000

 

249,358

 

3

 

(243,900

)

429,461

 

Less current maturities

 

2,438

 

3,005

 

3

 

 

5,446

 

Long-term debt net of current maturities

 

$

421,562

 

$

246,353

 

$

 

$

(243,900

)

$

424,015

 

 

27



 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

March 31,2004

 

ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview and Summary

 

We are a diversified, worldwide gaming company that (i) designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines; and (ii) owns and operates a casino. Operating under the name Bally Gaming and Systems, we are a worldwide leader in designing, manufacturing and distributing gaming machines, having marketed over 90,000 gaming machines during the past five years. We also design, integrate and sell highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with over 265,000 game monitoring units installed worldwide. Our dockside casino in Vicksburg, Mississippi offers 12 table games and approximately 930 gaming devices.

 

Several significant events should be highlighted. In July 2003, we announced our intention to transform our Company from a diversified gaming conglomerate to a technology provider to the gaming industry. In July 2003, we entered into definitive agreements to sell our route operations in Nevada and Louisiana, and our wall machine and amusement games business in Germany. The German business has been sold and the sales of the Nevada and Louisiana route operations are expected to be completed during fiscal 2004. In addition, on December 8, 2003, we announced that we had entered into an agreement for the sale of our Rail City Casino and the sale was comple4ted on May 3, 2004. For purposes of financial reporting, each of these four businesses are now treated as discontinued operations and their results are presented net of applicable income taxes, below income from continuing operations.

 

In December 2003, we acquired England-based Crown Gaming from Crown Leisure Limited one of the United Kingdom’s largest distributors of gaming and amusement machines.  In February 19, 2004 we acquired substantially all of the assets and liabilities of MindPlay, a leading developer of advanced table technology and finally on March 2, 2004, we completed the acquisition 100 percent of the outstanding shares of SDG, a leading supplier of Class II and Class III gaming devices, systems and technology.

 

Over the next several years we believe that the next significant expansion in gaming will be derived from the Video Lottery Terminal (“VLT”) and the Racino markets both domestically and internationally. SDG’s presence in both arenas and more importantly its technology supporting centrally determined gaming and Class II gaming will give us a meaningful presence in these markets and significant head start in capitalizing on the expected growth in these markets.

 

 

Liquidity and Capital Resources

 

As of March 31, 2004, we had $32.5 million in cash and cash equivalents, and $55.0 million in unborrowed availability on our revolving credit facility. In addition, we had net working capital of approximately $156.7 million at March 31, 2004, compared to $155.2 million at June 30, 2003, excluding liabilities of discontinued operations.  The changes within working capital are more fully described in the cash flow section below. Consolidated cash and cash equivalents at March 31, 2004 includes approximately $2.1 million of cash which is utilized in Casino Operations held in vaults, cages or change banks, as well as $16.8 million which is held in jackpot reserve accounts we maintain to ensure availability of funds to pay wide-area progressive jackpot awards. In addition, long-term investments of $2.6 million include investments in Treasury Strips for the previous jackpot winners.

 

Management believes that cash flows from operating activities, cash and cash equivalents held and the $125 million revolving credit facility commitment will provide the Company with sufficient capital resources and liquidity for operations.  At March 31, 2004, we had no material commitments for capital expenditures.

 

28



 

From time to time we become aware of potential acquisition or development opportunities and we may at any time be negotiating with respect to transactions or developments both domestically and internationally. Additionally, we regularly evaluate all of our assets within our portfolio and will continue to consider disposition of assets that, in our opinion, do not represent the best use of our capital. If such transactions occur our capital resources and liquidity may be affected.

 

Cash Flow

 

During the nine months ended March 31, 2004, we generated $68.1 million of cash flows from operating activities of continuing operations, compared to $25.0 million in the prior year period primarily as the result of a decrease in receivables related to the gaming and systems short-term financing for three significant property openings in the prior year.

 

During the nine months ended March 31, 2004, cash flow from investing activities of continuing operations included $10.9 million of cash provided from the sale of Bally Wulff (net of $5.6 million used to purchase a 5 million Euro certificate of deposit as collateral for a tax claim currently being negotiated with the German tax authorities, for which the Company has indemnified the buyer), offset by net cash used in the acquisitions of Crown of $3.9 million, SDG for $108.6 million includes the loan advances of $72.8 million (See Note for assets and liabilities assumed in acquisitions) and MindPlay of $11.0 million, capital expenditures totaling $9.6 million, and costs incurred to produce participation games totaling $26.4 million.

 

During the nine months ended March 31, 2004, $73.7 million cash was provided by financing activities of continuing operations resulting from a $70 million increase in term loans and $350.0 million of proceeds from the issuance of long-term debt and $6.6 million of cash provided from the exercise of stock options, offset by the $337.6 million payoff of debt from refinancing, $7.0 million of refinancing costs, $5.4 million of premium paid on the early redemption of the subordinated notes and principal payments on long term debt totaling $3.0 million.

 

Results of Operations for each Business Unit:

 

Bally Gaming and Systems

 

Summary financial results and operating statistics (dollars in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Game sales

 

$

46,750

 

$

49,138

 

$

130,954

 

$

141,456

 

System sales

 

21,602

 

31,102

 

59,918

 

91,835

 

Gaming operations

 

13,989

 

21,737

 

41,635

 

53,473

 

Total revenues

 

82,341

 

101,977

 

232,507

 

286,764

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

 

 

 

 

Game sales

 

20,890

 

22,059

 

58,436

 

64,926

 

System sales

 

16,452

 

22,684

 

45,491

 

69,402

 

Gaming operations

 

10,750

 

15,856

 

28,410

 

39,041

 

Total gross margin

 

48,092

 

60,599

 

132,337

 

173,369

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

19,094

 

24,329

 

50,255

 

62,905

 

Research and development costs

 

5,592

 

9,059

 

14,725

 

24,462

 

Depreciation and amortization

 

4,350

 

7,115

 

11,391

 

17,332

 

Operating income

 

$

19,056

 

$

20,096

 

$

55,966

 

$

68,670

 

 

29



 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

New Gaming Devices Sold

 

4,550

 

4,150

 

13,980

 

13,940

 

Game Monitoring Units Sold

 

10,075

 

9,660

 

25,100

 

31,960

 

End of period installed base of:

 

 

 

 

 

 

 

 

 

WAP games

 

1,720

 

1,670

 

 

 

 

 

Daily-fee games

 

2,330

 

5,780

 

 

 

 

 

Centrally determined games

 

 

15,170

 

 

 

 

 

 

Our Bally Gaming and Systems business unit reported an overall increase in revenues of 24% for the quarter and 23% for the year-to-date period when compared to the prior year periods. Bally game sales division reported an increase in revenues of 5% for the quarter and an increase of 8% for the year-to-date period. New units sold decreased 9% during the quarter and remained flat for the year-to-date period. The 9% decrease in new units sold for the quarter on a comparative basis reflects customer requested delays in delivering gaming units. The average new-unit selling price (excluding OEM games) increased 1% for the quarter and 8% for the year-to-date period.

 

Included in the Bally Gaming and Systems revenue discussed above is the revenue contribution from SDG, which totaled $15.2 million for the 29 days of March 2004 following the completion of the acquisition of SDG.  SDG’s revenues from game sales totaled $11.5 million and included the sale of 590 devices in the Washington and Rhode Island markets.  SDG’s gaming operations contributed $3.7 million in revenues from its daily-fee games discussed below.

 

Bally Systems division reported an increase in revenues of 44% for the quarter and 53% for the year-to-date period, when compared to the prior year periods, driven by a 4% decrease in game monitoring units shipped, offset by a continued increase in the average selling price per unit, increased sales of software licenses for eTICKET™, the industry’s leading single-wire TITO solution, as well as sales of its bonusing and promotions software. Bally Systems recurring hardware and software revenues for the quarter increased to $5.3 million, resulting from the larger base of installed systems, which now stands at approximately 265,000 units in 213 casinos world-wide.

 

The Gaming Operations division reported an increase of 55% in revenues for the quarter and an increase of 28% for the year-to-date period when compared to the prior year periods, driven by the 50% increase for the quarter and the 33% increase for the year-to-date-period in the average installed base of wide-area progressive (WAP) and daily-fee games deployed, which now total 1,670 and 5,780, respectively. This unit increase was driven by increases in the daily-fee games deployed during the quarter led by the installation of a combined 1,710 video lottery terminals for the three Racino properties that opened in New York during the quarter (820 Bally units, 890 SDG units). In addition to the New York placements, the gross placements for all other daily-fee and WAP games totaled 1,630 units, and there were 890 units returned resulting in a 740 net increase in the installed base of games on a sequential basis as of March 31, 2004 compared to December 31, 2003.  The base of recurring fee games now includes those from SDG, consisting of 10,700 in Washington and 4,200 Class II/Central determination games primarily in Oklahoma and Florida, and 200 Raining Diamonds games.

 

For the quarter ended March 31, 2004, the overall gross margin percentage for Bally Gaming and Systems increased to 59% and to 60% for the year-to-date period, primarily as a result of an increase in higher margin in Gaming and Systems operation revenues.

 

Selling, general and administrative expenses increased 27% over the prior year quarter, as a result of an overall increase in payroll, advertising and marketing expenses. Selling, general and administrative costs as a percentage of this business unit’s revenue remained constant at 24% for the quarter and 22% for the year-to-date period.  Research and development costs increased 62% for the quarter and 66% for the year-to-date period, resulting from an increase in headcount and consulting fees.  Total depreciation expense increased 64% over the prior year quarter and 52% for the year-to-date period, driven by the increase in the installed base of wide-area progressive and daily-fee games and as a result of the previously disclosed acquisitions.

 

30



 

During fiscal year 2004, Bally Gaming and Systems has experienced an almost four fold increase in the volume of product submissions to the various domestic regulatory bodies, each of which charges fees for the testing and approval of each product. Product testing costs are capitalized once technological feasibility has been established and are amortized, generally over a three year period once the product is placed in service. Product testing costs related to projects that are discontinued are expensed when such determination is made. The year-to-date fees incurred for such regulatory approvals and classified as Research and Development Cost exceeded $4.0 million. Of these amounts incurred, for the quarter ended March 31, 2004, the Company capitalized a total of $1.6 million that was directly attributable to products that have been approved and recorded amortization expense totaling $0.3 million for the quarter.

 

Rainbow Casino Operation

 

Summary financial results and operating statistics (dollars in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

13,891

 

$

14,262

 

$

38,158

 

$

39,329

 

Gross Margin

 

8,360

 

8,938

 

22,107

 

24,118

 

Selling, general and administrative

 

2,940

 

3,091

 

9,116

 

9,072

 

Depreciation and amortization

 

577

 

690

 

1,603

 

2,061

 

Operating income

 

$

4,843

 

$

5,157

 

$

11,388

 

$

12,985

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

Average Number of Gaming Devices

 

950

 

930

 

940

 

930

 

Average Number of Table Games

 

16

 

12

 

16

 

12

 

 

Rainbow Casino revenues increased 3% for the quarter and 3% for the year-to-date-period, when compared to the prior year periods. The revenue increase in the quarter is a result of a 16% increase in net win per day per gaming machine to $161, offset by 2% decrease in the average number of gaming machines for the quarter. The revenue increase for the year-to-date is a result of a 4% increase in net win per day per gaming machine to $148, offset by 1% decrease in the average number of gaming machines.

 

The gross margin for Casino Operations as a percentage of revenues increased to 60% for the quarter as compared to 63% for the prior year quarter. This increase was a result of decreases in certain operating costs. Cost of casino revenues includes gaming taxes, rental costs and direct labor including payroll taxes and benefits. The gross margin as a percentage of revenue increased to 61% for the year-to-date compared to 58% in the prior year period, primarily as a result of the reduction in headcount due to the conversion to cashless.

 

The overall selling, general and administrative expenses increased 5% over the prior year quarter, as a result of an increase in advertising and promotional expenses. Selling, general and administrative costs as a percentage of this business unit’s revenue increased to 22% in the current quarter compared to 21% in the prior year quarter. Selling, general and administrative costs as a percentage of this business unit’s revenue for the year-to-date period decreased slightly to 23% from 24%. This decrease is primarily a result of lower headcount. Total depreciation expense increased 20% over the prior year quarter and 29% for the year-to-date period, as a result of the capital improvements made to the Rainbow Casino in the prior year.

 

31



 

Discontinued Operations

 

As previously discussed, we announced that we had entered into definitive agreements for the sale of our two route operations in July 2003 and the sale of our Rail City Casino in December 2003. For purposes of financial reporting, these three business units are now treated as discontinued operations.

 

Rail City Casino

 

As previously discussed, we announced that we had entered into definitive agreements for the sale of our two route operations in July 2003 and the sale of our Rail City Casino in December 2003. For purposes of financial reporting, these three business units are now treated as discontinued operations.

 

Summary financial results and operating statistics are as follows (dollars in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,466

 

$

5,955

 

$

15,767

 

$

17,202

 

Gross Margin

 

2,641

 

2,906

 

7,212

 

8,092

 

Selling, general and administrative

 

985

 

905

 

2,757

 

2,811

 

Depreciation and amortization

 

319

 

 

827

 

565

 

Operating income

 

$

1,337

 

$

2,001

 

$

3,628

 

$

4,716

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

Average Number of Gaming Devices

 

560

 

580

 

550

 

580

 

Average Number of Table Games

 

8

 

6

 

8

 

7

 

 

Rail City Casino revenues increased 9% for the quarter and increased 9% for the year-to-date period, when compared to the prior year periods. The revenue improvement in the quarter was attributable to a 4% increase in the average number of gaming machines and 6% increase in net win per day per gaming machine to $96. The revenue increase for the year-to-date is due to a 5% increase in the average number of gaming machines and a 7% increase in net win per day per gaming machine to $92.

 

The gross margin for Casino Operations as a percentage of revenues increased to 49% for the quarter and to 47% for the year-to-date period. This increase was a result of decreases in certain operating costs. Cost of casino revenues includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

 

The overall selling, general and administrative expenses decreased 8% over the prior year quarter, as a result of a decrease in advertising and promotional expenses. For the year-to-date period selling, general and administrative costs increased by 2% compared to the prior year period, as a result of an increase in payroll and payroll related costs. Selling, general and administrative costs as a percentage of this business unit’s revenue decreased to 15% in the current quarter and to 16% for the year-to-date period. In accordance with generally accepted accounting principles, depreciation and amortization for this discontinued operation ceased as of December 8, 2003 as a result of its designation as assets held for sale. Had depreciation and amortization expense been recorded for the current period, operating income for the discontinued operation would have decreased by $0.3 million for the quarter and $0.5 million for the year-to-date period.

 

The sale of the Rail City Casino to The Sands Regent was completed on May 3, 2004.

 

32



 

Route Operations

 

Summary financial results and operating statistics are as follows (dollars in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Nevada

 

$

50,873

 

$

58,030

 

$

151,747

 

$

162,426

 

Louisiana

 

3,910

 

4,812

 

11,194

 

12,702

 

Total revenues

 

54,783

 

62,842

 

162,941

 

175,128

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

 

 

 

 

 

 

 

 

Nevada

 

7,681

 

8,699

 

23,009

 

24,622

 

Louisiana

 

1,296

 

1,662

 

3,724

 

4,290

 

Total gross margin

 

8,977

 

10,361

 

26,733

 

28,912

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

3,597

 

3,646

 

9,595

 

10,166

 

Depreciation and amortization

 

3,817

 

 

10,442

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

 

 

Nevada

 

962

 

5,784

 

5,188

 

16,661

 

Louisiana

 

601

 

931

 

1,508

 

2,085

 

Total operating income

 

$

1,563

 

$

6,715

 

$

6,696

 

$

18,746

 

 

 

 

 

 

 

 

 

 

 

Operating Statistics:

 

 

 

 

 

 

 

 

 

Average Number of Gaming Devices

 

 

 

 

 

 

 

 

 

Nevada

 

7,985

 

8,360

 

8,155

 

8,205

 

Louisiana

 

725

 

760

 

715

 

740

 

Total Gaming Devices

 

8,710

 

9,120

 

8,870

 

8,945

 

 

Revenues from the Nevada route operations increased 14% for the quarter and 7% for the year-to-date period. For the quarter the increase was attributable to a 5% increase in the average number of gaming machines for the quarter and an increase in the average net win per gaming machine per day of 7% to $74.00 from $69.00. For the year-to-date period the increase is attributable to a 6% increase in the average net win per gaming machine per day to $70.50 from $66.60 and a slight increase in an average number of gaming machines deployed. Gamblers’ Bonus, a cardless players club and player tracking system, continued to have a favorable impact on the net win per day. As of March 31, 2004, the Gamblers’ Bonus product was installed in over 4,230 gaming machines at approximately 435 locations statewide or 51% of the installed base of gaming machines.

 

Revenues from Louisiana route operations increased 23% for the quarter and 13% for the year-to-date period. For the quarter the increase is a result of a 17% increase in the net win per gaming machine per day to $71.10 from $60.50 and a 5% increase in the number of units deployed compared to the prior year quarter. For the year-to-date period the increase is a result of a 9% increase in the net win per gaming machines per day to $61.80 from $56.50 and a 4% increase in the number of units deployed compared to the prior year period.

 

For the quarter ended March 31, 2004, the overall gross margin percentage for the Route Operations remained relatively constant at 16%. The overall selling, general and administrative expenses in the quarter increased 1% and 6% for the year-to-date period, primarily as a result of an increase in payroll and payroll related costs. Selling, general and administrative costs as a percentage of revenue remained at 6% compared to the prior year quarter.

 

The results of the Nevada and Louisiana Route operations for the quarter and the nine months ended March 31, 2003 include depreciation and amortization expense. In accordance with generally accepted accounting principles, depreciation and amortization for these discontinued operations ceased as of July 1, 2003 as a result of their designation as assets held for

 

33



 

sale. Had depreciation and amortization expense been recorded for the current period, operating income for the discontinued operations would have decreased by $3.6 million for the quarter and $10.9 million for the year-to-date period.

 

Parent Company and other unallocated income (expense)

 

Summary financial results (dollars in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

2,896

 

$

2,778

 

$

7,754

 

$

8,835

 

Depreciation and amortization

 

600

 

323

 

1,686

 

1,202

 

Total Parent company expense

 

$

3,496

 

$

3,101

 

$

9,440

 

$

10,037

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

$

54

 

$

1,817

 

$

181

 

$

1,943

 

Interest expense

 

(6,269

)

(4,590

)

(19,464

)

(14,188

)

Minority interest

 

(729

)

(722

)

(1,483

)

(1,749

)

Refinancing charge

 

 

 

 

(12,293

)

Other, net

 

121

 

(182

)

487

 

(1,081

)

Total other expense

 

$

(6,823

)

$

(3,677

)

$

(20,279

)

$

(27,368

)

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

$

4,653

 

$

6,234

 

$

14,609

 

$

15,944

 

 

The general and administrative expenses decreased 4% over the prior year quarter. This decrease was driven by lower corporate litigation costs and a recovery of certain legal costs previously paid. Total depreciation expense decreased 46% for the quarter as a result of lower amortization expenses due to lower capitalized costs in the recent debt refinancing transaction.

 

Interest expense (net of interest income) for the current quarter totaled $2.8 million compared to $6.2 million in the prior year period. The lower interest expense in the current quarter reflects reduced interest in the current rates post-refinancing. Interest income during the quarter ended March 31, 2004 included $1.5 million of interest on the loans to SDG, which ceased upon the acquisition of SDG on March 2, 2004.

 

The nine months ended March 31, 2004, reflect a $12.3 million refinancing charge recorded in the first quarter consisting primarily of a $5.0 million prepayment penalty for the redemption of our Subordinated Notes, a non-cash charge of $7.0 million to write off the deferred financing costs, and $0.3 million of fees and expenses. We recorded a tax benefit from these charges totaling approximately $4.8 million.

 

The continuing operations tax rate of 34% for the quarter and 36% for the year-to-date period reflects the realization of research and development tax credits and a reconciliation of certain deferred tax assets and liabilities to the 2003 tax return.

 

34



 

Results of Operations

 

The following table reconciles our earnings before interest, taxes, depreciation and amortization (“EBITDA”) to our consolidated net income from continuing operations (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

8,927

 

$

12,241

 

$

23,026

 

$

28,306

 

Income tax expense

 

4,653

 

6,234

 

14,609

 

15,944

 

Other expense, net

 

608

 

904

 

996

 

2,830

 

Interest expense, net

 

6,215

 

2,773

 

19,283

 

12,245

 

Refinancing charge

 

 

 

 

12,293

 

Operating income

 

20,403

 

22,152

 

57,914

 

71,618

 

Depreciation and amortization

 

5,527

 

8,128

 

14,680

 

20,595

 

EBITDA from continuing operations

 

$

25,930

 

$

30,280

 

$

72,594

 

$

92,213

 

 

The following tables reconcile operating income by business segment to EBITDA:

 

For the three months ended March 31, 2003 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

19,056

 

$

4,350

 

$

23,406

 

Casino Operations

 

4,843

 

577

 

5,420

 

Corporate expenses

 

(3,496

)

600

 

(2,896

)

 

 

$

20,403

 

$

5,527

 

$

25,930

 

 

For the three months ended March 31, 2004 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

20,096

 

$

7,115

 

$

27,211

 

Casino Operations

 

5,157

 

690

 

5,847

 

Corporate expenses

 

(3,101

)

323

 

(2,778

)

 

 

$

22,152

 

$

8,128

 

$

30,280

 

 

For the nine months ended March 31, 2003 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

55,966

 

$

11,391

 

$

67,357

 

Rainbow Casino

 

11,388

 

1,603

 

12,991

 

Corporate expenses

 

(9,440

)

1,686

 

(7,754

)

 

 

$

57,914

 

$

14,680

 

$

72,594

 

 

35



 

For the nine months ended March 31, 2004 (from continuing operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Bally Gaming and Systems

 

$

68,670

 

$

17,332

 

$

86,002

 

Rainbow Casino

 

12,985

 

2,061

 

15,046

 

Corporate expenses

 

(10,037

)

1,202

 

(8,835

)

 

 

$

71,618

 

$

20,595

 

$

92,213

 

 

The following table reconciles our earnings before interest, taxes, depreciation and amortization (“EBITDA”) to our consolidated net income from our discontinued operations (in 000’s):

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations

 

$

3,853

 

$

1,593

 

$

7,865

 

$

10,299

 

Income tax expense

 

920

 

7,023

 

3,501

 

11,747

 

Other expense, net

 

338

 

83

 

507

 

1,076

 

Interest (income) expense, net

 

(236

)

17

 

(835

)

340

 

Operating income

 

4,875

 

8,716

 

11,038

 

23,462

 

Depreciation and amortization

 

4,943

 

 

12,710

 

565

 

EBITDA from discontinued operations

 

$

9,818

 

$

8,716

 

$

23,748

 

$

24,027

 

 

For the three months ended March 31, 2003 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Route Operations

 

$

1,563

 

$

3,817

 

$

5,380

 

Wall Machines and Amusement Games

 

1,975

 

807

 

2,782

 

Rail City Casino

 

1,337

 

319

 

1,656

 

 

 

$

4,875

 

$

4,943

 

$

9,818

 

 

For the three months ended March 31, 2004 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Route Operations

 

$

6,715

 

$

 

$

6,715

 

Rail City Casino

 

2,001

 

 

2,001

 

 

 

$

8,716

 

$

 

$

8,716

 

 

36



 

For the nine months ended March 31, 2003 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income
(Loss)

 

Depreciation
and
Amortization

 

EBITDA

 

 

 

 

 

 

 

 

 

Route Operations

 

$

6,696

 

$

10,442

 

$

17,138

 

Wall Machines & Amusement Games

 

714

 

1,441

 

2,155

 

Rail City Casino

 

3,628

 

827

 

4,455

 

 

 

$

11,038

 

$

12,710

 

$

23,748

 

 

For the nine months ended March 31, 2004 (from discontinued operations) (in 000’s):

 

 

 

Operating
Income

 

Depreciation
and
Amortization

 

EBITDA

 

Route Operations

 

$

18,746

 

$

 

$

18,746

 

Rail City Casino

 

4,716

 

565

 

5,281

 

 

 

$

23,462

 

$

565

 

$

24,027

 

 

We believe that the analysis of EBITDA is a useful adjunct to operating income, net income, cash flows and other GAAP-based measures. However, EBITDA should not be construed as an alternative to net income (loss) or cash flows from operating, investing and financing activities determined in accordance with GAAP or as a measure of liquidity. EBITDA is a common measure of performance in the gaming industry but may not be comparable to similarly titled measures reported by other companies. We disclose EBITDA primarily because it is a performance measure used by management in evaluating the performance of our business units and is one of several performance measures used in our management incentive plan.  Additionally, EBITDA is utilized as a performance measure in covenants for our bank credit agreement.

 

37



 

ITEM 3.                             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Currency Rate Fluctuations

 

We derive revenues from our non-U.S. subsidiaries, all of which revenues are denominated in their local currencies, and their results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Most of the currencies in countries in which we have foreign operations strengthened versus the U.S. dollar in 2003 and 2004, which resulted in assets and liabilities denominated in local currencies being translated into less dollars. We do not currently utilize hedging instruments.

 

Market Risks

 

During the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest and currency rate movements, collectibility of accounts and notes receivable, and recoverability of residual values on leased assets. We continually assess these risks and have established policies and practices designed to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future.

 

We have performed a sensitivity analysis of our financial instruments, which consist of our cash and cash equivalents and debt. We have no derivative financial instruments. In performing the sensitivity analysis, we define risk of loss as the hypothetical impact on earnings of changes in the market interest rates or currency exchange rates.

 

The results of the sensitivity analysis at March 31, 2004, are as follows:

 

Interest Rate Risk:

 

As of March 2004, we had total debt of approximately $429.5 million, consisting primarily of the new $350 million term loan and the initial $70 million borrowing on the revolver. The interest rate for each loan is set on the borrowing date and is effective for the term outstanding. If the LIBOR rates were to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $4.3 million on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as their functional currency. A 10% fluctuation in the exchange rates of these currencies against the U.S. dollar would result in a corresponding change in earnings reported in the consolidated group of approximately $90,000.

 

38



 

ITEM 4.                             DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the company’s disclosure controls and procedures as defined in Securities Exchange Act Rule 13a-15(e) as described at the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.  During the period covered by this report there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II

 

ITEM 1.                                  Legal Proceedings

 

There have been no material changes in any legal proceedings since the filing of the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2003.

 

ITEM 6.                                  Exhibits and Reports on Form 8-K

 

a.                                       Exhibits

 

31.1

 

Certification of Chief Executive Officer, pursuant to Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended.

 

 

 

31.2

 

Certification of Chief Financial Officer, pursuant to Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended.

 

 

 

32.1

 

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

39



 

b.                                      Reports on Form 8-K

 

                  The Company filed a Form 8-K on January 15, 2004 announcing the financial results for the period ended December 31, 2003.

                  The Company filed a Form 8-K on February 19, 2004 announcing that the Company had acquired substantially all the assets and liabilities of the privately held MindPlay LLC.

                  The Company filed a Form 8-K on March 2, 2004 announcing that the Company completed the acquisition of the privately held Sierra Design Group.

 

40



 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

 

 

 

ALLIANCE GAMING CORPORATION

 

Date: May 13, 2004

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

By

  /s/ Robert L. Miodunski

 

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

By

  /s/ Robert L. Saxton

 

 

 

 

 

Executive Vice President, Chief Financial

 

 

 

 

Officer and Treasurer (Principal

 

 

 

 

Financial and Accounting Officer)

 

 

 

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